What Life360, Inc.'s (ASX:360) 58% Share Price Gain Is Not Telling You

Life360, Inc. (ASX:360) shareholders have had their patience rewarded with a 58% share price jump in the last month. The annual gain comes to 121% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Life360 may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 12.2x, when you consider almost half of the companies in the Software industry in Australia have P/S ratios under 3.2x and even P/S lower than 1.2x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for Life360

How Life360 Has Been Performing

With revenue growth that's superior to most other companies of late, Life360 has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Life360.

Is There Enough Revenue Growth Forecasted For Life360?

In order to justify its P/S ratio, Life360 would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 26%. The strong recent performance means it was also able to grow revenue by 182% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 21% per year over the next three years. With the industry predicted to deliver 48% growth per year, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Life360 is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Life360's P/S?

Life360's P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've concluded that Life360 currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

It is also worth noting that we have found 2 warning signs for Life360 that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.